Justices Limit Punitive Damages in Victory for Tort Revision

By LINDA GREENHOUSE

Published: April 8, 2003

WASHINGTON, April 7—
The Supreme Court set new constitutional limits on punitive damages today in a ruling that the business community hailed as a major victory in the long-running effort to shield corporate defendants from unconstrained jury awards.

Punitive damages are not new to the court, which has wrestled with the issue for 20 years and has become increasingly sympathetic to defendants. But this decision in favor of the State Farm insurance company went beyond recent rulings in ways that could have a widespread effect.

The most significant departure in the 6-to-3 decision was the court's declaration that juries should generally not be permitted to consider a defendant's wealth when setting a punitive damage award. The practice is common, and the court had not previously addressed it in a majority opinion. ''The wealth of a defendant cannot justify an otherwise unconstitutional punitive damages award,'' Justice Anthony M. Kennedy said for the majority today.

The court overturned $145 million in punitive damages that a Utah jury awarded against State Farm and that the Utah Supreme Court upheld. The jury had awarded $1 million in compensatory damages to a Utah couple, State Farm policyholders, who sued the company for its refusal to settle a claim and for exposing them to personal liability beyond the limits of their policy for a car accident in which a jury found the husband liable. State Farm eventually paid the claim.

Justice Kennedy said the ratio of 145 to 1 resulted in a damage award that was ''neither reasonable nor proportionate to the wrong committed.'' He called it ''an irrational and arbitrary deprivation of the property of the defendant.''

In a dissenting opinion, Justice Ruth Bader Ginsburg objected that the court had arrogated to itself a task best left to state courts and state legislatures. She called the court ''boldly out of order.''

Justices Antonin Scalia and Clarence Thomas also dissented in separate opinions, citing their views expressed in earlier cases that the Constitution's due process guarantee simply does not apply in the context of punitive damages. All three dissenters today had also dissented in the court's last major punitive damages ruling, a 1996 decision that overturned a $2 million punitive damage award against the BMW automobile company, won by an Alabama man who was not informed that the paint had been touched up on his new car.

Chief Justice William H. Rehnquist joined the dissenters in the 1996 case, BMW of North America v. Gore. Today, he changed sides, without explanation, signing Justice Kennedy's majority opinion along with Justices John Paul Stevens, Sandra Day O'Connor, David H. Souter and Stephen G. Breyer.

State Farm's appeal presented a wide array of issues, and the argument in the case last December appeared confusing and inconclusive. But there was nothing inconclusive about the court's decision, State Farm v. Campbell, No. 01-1289. ''This case is neither close nor difficult,'' Justice Kennedy said.

While State Farm's treatment of its policyholders, Curtis and Inez Campbell, ''merits no praise,'' and could even be considered ''reprehensible,'' he said, the punitive damage award fails to meet any of the guidelines the court set in the 1996 case for evaluating such awards.

He said that rather than insisting that the punitive damage award bear a reasonable relationship to the harm done to the Campbells -- essentially, 18 months of uncertainty on their financial future -- the Utah Supreme Court had permitted the case to be ''used as a platform to expose, and punish, the perceived deficiencies of State Farm's operations throughout the country.''

That was impermissible for two reasons, Justice Kennedy said. First, states do not have ''a legitimate concern'' in imposing damages for conduct outside their borders or in reaching conclusions about what another state's court system might deem worthy of punishment. That was ''a basic principle of federalism,'' he said.

And second, Justice Kennedy said, punitive damages must relate to the harm done to the individual plaintiff and not to other plaintiffs, real or hypothetical. ''A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business,'' he said, adding that without that constraint, defendants could be punished multiple times for the same conduct.

The BMW decision had not set a particular ratio between punitive and compensatory damages that would be acceptable, but suggested that 4:1 would be a reasonable maximum in most cases. Today, the court moved closer to setting a firm line. ''When compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee,'' Justice Kennedy said.

This part of the opinion drew a sharp response from Justice Ginsburg. Such line drawing ''could hardly be questioned'' if done by a legislature or a state supreme court, she said, but was ''boldly out of order'' when done by the United States Supreme Court and imposed on the states. Her opinion included a discussion of State Farm's business practices that was more unflattering than the description of the case history contained in the majority opinion.

Finally, Justice Kennedy said, a punitive damage award should be related to the size of a civil penalty the state could impose for the same conduct. In this case, he said, State Farm could have been fined $10,000 under Utah law for its treatment of its policyholders.

The decision today was undoubtedly not the court's last word on punitive damages. Several times, Justice Kennedy noted the court was dealing with a case in which only economic, and not physical, harm had occurred, suggesting the court might make a more generous allowance for punitive damages in product liability cases involving injury or death.